Question

Next, how would neoclassical economists explain the performance of the economy during the last few years? What has happened to aggregate supply? What evidence can you present to support this position? Evaluate the evidence and decide which interpretation makes the most sense to you. Explain your reasoning. 

Answer 1

In the last few years, economy has been fighting to recover from the recession due to the financial crises of 2008. In the light of it, different actions were taken and it showed results also. Here, Keynesian economic perspectives proposed the strong government intervention in regulating the economy and making it come from recessionary stage of business cycle to expansion stage of business cycle. While doing so, It made the government to spend more and or cut taxes. Now, Keynesian economists will explain the recovery as a result of the action taken up by the government in the form of more than $750 billion stimulus package, reduction in taxes and complemented by expansionary monetary policy. It increased the aggregate demand and economy grew in last few years. So, the positive results will be claimed by these economists. To support their claims, the economy is growing with a real GDP growth rate of approx. 2.9% and having an unemployment rate of around 3.7% by the end of September 2018. Further, the inflation rate is 1.9% in the US economy.
In contrast to it, the neoclassical economists, would like to evaluate the economy in the last few years as a continuous efforts of automatic stabilizers to pull back the economy towards its normal level. To support their claims, they argue the increased number of unemployment benefits claim by the people and decrease in jobs, causing the increased number of workers, ready to work at lower wages. It slowly helped the firms to capitalize on it and increased the production that was absorbed by people as they were getting unemployment benefits. The new jobs were created and economy slowly recovered from the recession. As a proof of it, neoclassical economists, would like to show the decreased number of unemployment benefits claims and it only happens when people are in jobs. So, recovery of the economy is also credited to the neoclassical economic principles.
Though, in reality the economy recovered due to the active intervention of the government via fiscal policy and Federal reserve via, monetary policy so that the economy gets a regular stimulation and boost. So, Keynesian perspective holds more true, effective and evident than that of neoclassical perspective, despite automatic stabilizers playing its own role in helping the economy recover.